The case for a new political economy is laid out in three new books.

How do you successfully break a mistaken and destructive intellectual consensus? Common sense has it that Britain is a front-line developed country that, as a precondition for a return to growth and full employment, must first succeed in lowering its public and private debts, dramatically and simultaneously.

Every assumption in that sentence is wrong. Britain is not a front-line developed economy. To deleverage simultaneously is to invite protracted depression. The challenge instead is to develop our economy as much as make it grow, and to ensure that overall demand, notwithstanding the overhang of private debt, grows consistently.

However, it is the other nonsense that defines public policy and the terms of our national conversation. It’s a system of thought that needs to be despatched in its entirety to the outer darkness. We should begin thinking in completely different terms and categories. The question is: how?

Paul Krugman, Larry Elliott and Dan Atkinson try to do exactly that in their latest books. Elliott and Atkinson’s thesis is that such epic economic mistakes have been made over the last generation, compounding those of the past 100 years, that the productive sinews of Britain’s economy – and its ability to renew that productive capacity – have shrunk to such a degree that Britain can no longer be considered a developed economy. In all sorts of ways – from its reliance on foreign direct investment to its faddish celebration of empty-headed, if charismatic, leaders – it displays the characteristics of a developing economy. It is wedded to a “no-strategy strategy”, as Elliott and Atkinson put it, followed by a political, financial and business elite that appears to be in denial about the country’s circumstances and needs.

The weakest plank of this non-strategy was the coalition government’s self-defeating attempt to eliminate the structural public-sector deficit in four years, with roughly four-fifths of the task assumed by indiscriminate spending cuts – a plan whose intellectual framework Krugman demolishes. The theology was that the private sector would effortlessly shrug off its uncertainties in such a high-risk environment and occupy the space left by the overextended, bloated Brownian state – every pound cut by the government being a pound that would be spent by the private sector, even if there might be some transitional friction.

Nothing more needed to be done. Distinguished officials such as the governor of the Bank of England, the permanent secretary to the Treasury and top economists at the newly established Office for Budget Responsibility signed up for what, in the context of a credit crunch, a stricken banking system and a vast legacy of private debt, could only lead to stagnation. And a know-nothing business community acted as cheerleader, its denizens writing letters to the right-wing press urging ever more austerity as a precondition for them to invest with confidence and to hire workers – a promise that has been utterly confounded.

The non-strategy has been the disaster that a minority of us predicted – although anybody with a sense of economic history, an understanding of how markets can get locked in upward and downward spirals and a willingness to recognise that both the private and public sectors cannot unwind their debts at once could have arrived at the same answer. Yet to challenge it was to be dismissed as a maverick or a knave. “Serious people” were for austerity.

For Krugman, who won the Nobel Prize in Economics in 2008, this is a first-order intellectual mistake – a British variant of a global error. As he points out, in a market economy your spending is my income and my spending is your income – a truth amplified, in the wake of a recession induced by too much private debt, by another simple aphorism: the more debtors pay, the more they owe. In other words, if debtors pay off their debts in a highly indebted economy sliding into recession, they shrink the incomes of others, who now spend less, so that everyone gets caught in a deflationary trap. Hence what is happening in Britain, Europe and the United States, where Barack Obama is not following through with his stimulus programme.

Krugman examines how and why a plainly crazy economic view has had such a grip on western policymakers. He identifies a number of factors: first, the fear of inflation caused by a government-initiated boost to demand – but there is none and can be none in a depressed economy; second, the “confidence fairy”, the be - lief that financial discipline creates confidence, despite the obvious truth that a collapse in spending and income sows fear and panic; third, the elegance of the logic of free-market economics – the problem being that a logic that inflicts unnecessary hardship is irrational. And lastly there is the appeal to conservatism. In Britain it is often hard to appreciate just how ideologically conservative the American right is. For example, in Texas there are textbooks that don’t mention the New Deal for fear that young students might conclude that there is virtue in government. But even the right wants jobs and growth, so it is still hard to understand why intelligent people accept the current self-defeating lunacies with so little challenge – and why Krugman and others are so marginalised.

I suspect Elliott and Atkinson aren’t going to have much more success with their thesis. Britain does have some economic assets – “bullshit industries”, Elliott has called them, from business consultancy to developing television programmes – but they are not large enough to drive economic recovery and decisively lower unemployment. Even appeals to manufacturing successes – for instance, car production in this country will soon pass the record of 1.9 million units –have to be qualified by the recognition that they are achieved by foreign companies and that the domestic contribution even from the UK supply chain is slight: a pattern more befitting a developing country such as Taiwan or Chile than a developed one. The British are like the barely educated natives of a newly decolonised country – relying on the skills and capital of others to endow them with productive capability.

A reckoning is imminent. Inability to pay one’s way in the world means that the country’s buying muscle for scarcer food, energy and raw materials is under continual pressure. Too many constituencies in Britain – from welfare recipients to business – depend on a squeezed public purse to sustain their livelihood. Innovation and investment are chronically poor.

Elliott and Atkinson find themselves in the same predicament as Krugman in driving their point home. They want Britain’s leaders to stop imagining their country is still a big beast and to start thinking in developmental terms instead. But their manifesto seems to consist largely in a commitment to picking winners. The absence of a comprehensive and properly worked-out view of an economic alternative gives them the freedom to take witty potshots at any number of their bêtes noires – but they need to go much further.

The authors describe what has gone wrong brilliantly but their economics is descriptive rather than purposefully analytical: they lack a solid political economy with an accompanying vision of what a good British economy and society would look like. What kind of Britishcapitalism would drive the development they want? At one point, for example, they calculate that the decline in the strength of trade unions has led to a 4 per cent drop in the share of GDP claimed by wages, with a compensating rise in the profit share, which plainly has not been spent on innovation and investment.

So do we want to see the return of 1970sstyle unions? If not, what kind of unionism do we need and how would we go about creating it? How would that mesh with more longterm committed ownership rather than the transactional ownership that they deplore? Why has so much of British industry been so poorly led and financed? Why has so much of it been sold to foreigners? What could be done to promote innovation? How could Britain create a new generation of great names and companies to replace those the authors nostalgically mourn? If they don’t believe in socialism, Swedish social democracy or unrestrained laissez-faire, what is their recipe? And what would make it morally compelling?

The main reason the conservative hegemony holds is that its critics have, until now, done little more than rail against its stupidities. Socialism may have proved to have been a wrong turn but at least it inspired millions becauseunderpinning it was a vision of how men and women should live together. The “Austerians”, as Krugman mockingly calls them, are so hard to dislodge because their position is built upon the view that debt is morally wrong and that austerity is a correctional moral purgative – we partied and now we pay the price.

Krugman’s final chapter argues for alternatives that would doubtless lift the economy and with which I strongly agree – but ultimately they are techniques, ways of not making the current mistakes, not a picture of a better world. Britain, the US and Europe need a better capitalism informed by a persuasive moral outlook that trumps that of the right. It is not enough to deplore avoidable waste or to insist that decline could be averted, that we should have more “stuff” and more jobs. To challenge the consensus, we have to show that the route to more is grounded in a view of the good society that not only delivers more material goods but is a better way of living together. That is a message that must be reiterated and rammed home.

Such a claim is at the heart of a new book by Robert and Edward Skidelsky. Western societies, they argue, have lost their moral bearings by placing their faith in the belief that more of everything is the source of happiness – and that states and governments should be neutral when it comes to making moral judgements about what it means to live a good life.

Less inequality would be good economically, socially and morally. It would also promote the growth and development that Krugman, Elliott and Atkinson – and I – want to see. But you don’t get more equality without a sense of fraternity. You don’t get either without daring to think about what constitutes the good life beyond material goods – and so much of the economic literature fails to get beyond a debate about how to have more.

The Skidelskys argue that political economy needs to rediscover the idea that the ultimate purpose is to live lives bounded by moral constraints – old-fashioned virtue, acknowledgement of the claims of others and the pleasures of life in a society of a citizens. Until Krugman, Elliott and Atkinson can better answer the question posed by the Skidelskys – what is the wealth that they want to generate for? – they will do no better than draw with their opponents. They won’t beat them, even if they effectively expose their delusions and terrible mistakes.

The bad news is that there is even more work to be done. The good news is that five writers of this stature are putting their shoulders to the wheel. And it is becoming clear what the big winning arguments are going to be.

Will Hutton is principal of Hertford College, Oxford, and a columnist for the Observer

Discussed in this review:

Going South: Why Britain Will Have a Third World Economy by 2014 Larry Elliott and Dan Atkinson (Palgrave Macmillan, 400pp, £14.99)

End This Depression Now! by Paul Krugman (W W Norton, 272pp, £14.99)

How Much Is Enough? by Robert Skidelsky and Edward Skidelsky (Allen Lane, 256pp, £20)